Lecture 003 Process Costing - (with new audio) Show Video

We. Also use it to determine what's in our work in process inventory at, the end of the period since that's going to go on the balance sheet remember we have three, inventories. Raw materials, work in process and, finish goods we're. Going to determine the cost per unit produced and we, can use this data to evaluate, efficiency, are we, manufacturing. Efficiently. From this period to last period are our material. Costs increasing, or our labor costs increasing, it helps us to identify areas in, which our costs are increasing so we can understand. It better and perhaps, take corrective action, or if we can't fix it maybe we have to raise the price. Okay. So let's take a look at this example here, at the end of a period there, may be five hundred partially. Completed units of a product that is 70%, complete, in terms of materials, and 45%. Complete. In terms of labor and overhead now, let's think back for a moment in a previous, chapter we said. That, labor and overhead combined. Were what was called conversion. Costs because we're converting raw, materials, into, a finished product how do you convert steel. And glass and upholstery, and rubber into a finished process a finished. Product you take skilled labor and you take a lots of machines and, and you, put you drive it with energy and that's your overhead cost and you and you come up with a finished product so, 70%. Complete, from a material standpoint, 45. Percent complete from a conversion, standpoint. Labor plus overhead, together makes. It difficult to determine the value of ending work in process as, well, as well, what is the cost of this in terms, of a unit cost and what. Are we going to put on the balance sheet. Okay. Another example. Hundred. Bottles half, filled could. Be consolidated. To. Make, fifty. Complete. Or 100% full bottles pretty. Straightforward, concept so the second example now. I have a dog house that's comprised, of five, pieces, of wood, they're all the same piece that same, size piece of wood and there's no back or front you can pass through it simply basic shelter from, Sun or rain, okay. Now, each, piece, if there's five pieces each piece represents. 20%. Of the, dog house so, if there's two pieces I've connected, these, two pieces and. That. Means they're 40%. Complete so I have five, dog houses, 40%, complete if, I, were to break those pieces. Apart. Individually. I could, construct, two. Dog. Houses because look I've got ten pieces of wood I need five pieces to make one house so ten pieces I could have made two complete dog houses instead, I have five houses that, are forty percent complete. Okay. Five. Products. Forty percent complete, are the equivalent, to two. 100%. Complete products five times 0.4, gives you two that's how we calculate, it. All. Right. If. A batch of cookie, batter or we can go back to our pancake, example. Requires. 10, pounds, of mix to, be poured into a bowl at the beginning of the process and it. Requires five, hours of heating. Continuous. Stirring by, a person, then if the batch was. Started, at 3 p.m. on December, 31st and, the, workday, ends at 5 p.m., then. Think about what we have we would have 100%. Of the materials because we dumped everything, into the bag all at once, but. It would have 40%, of, Labor and. 40%. Of open now in our, example we're. Gonna make the following assumptions, and this is important, that, the materials, are all added. In the beginning of the period just think we're pouring the mix in at the beginning the period for many companies that's not the case ok, you could have 60%, materials, 30%. Labour or 80% labour you can have varying, percentages but we're gonna make two assumptions first, materials.

Enter. The production process at the beginning of the period we dump them in the bowl and. Labor. And overhead or conversion. Is incurred. Evenly. Throughout, the period we're gonna make those assumptions so. If, a. Batch, takes 5 hours and we've worked for 2 hours 2/5. We've, completed, 40%, of the labor 40%. Of the overhead okay. So, the completions, are different for materials, than they are for conversion, and that makes it difficult determining. Unit, cost that's sitting in ending inventory, as. Well as the value of ending inventory and so this is where we use this equivalent. Whole unit, concept. Ok. All. Right now there. Are two different, methods, we can use and, I'm, going to go over both methods, very. Important. You. Will know which, method you need to use for your class it'll, either be the weighted average method or, the FIFO, method that, will be communicated. To you you will need to know that, one method I'm going to go through both methods, but, you only need to know the method that you're being held accountable for weighted. Average or FIFO, not both. Okay. So we use these methods to determine ending, work in process inventory, and, the. Value of goods that being transferred, out of our department either. Into, the next work, in process department, or if we're the last work in process department, the, cost being transferred, the finish goods so, if we have to know what the complete cost of the product is when, it goes from whip A to B to C and then to finish goods okay. Notice, both, methods, will produce similar results when applied in a consistent fashion they're not exact but pretty darn close, okay. And again I will let you know which method you need to know. Okay. Here's our example. Let's. Let's follow, this closely all. Right we'll read through it we. Have in beginning, inventory we, have six thousand. Two hundred units. That, are 60%. Complete. From a conversion standpoint. And they're, 100%. Complete. From. A material standpoint because we already dumped everything, into. The bowl the mold whatever you want to call it okay. So sixty two hundred units, and if. It helps from a visual standpoint think of like a car that's partially manufactured. Okay. It, has all the materials but it's sixty percent complete, from a labor and overhead standpoint.

Okay. We, need this in order to determine cost per unit transferred, out as well. As for determining what's an ending, work in process inventory. Okay. Now. Now. That we have equivalent units we. Can calculate the cost per equivalent whole, unit for materials, as well. As for conversion, and they're two separate numbers. Very. Important, for FIFO, first-in first-out we use the cost that we added this period and to go back to a previous slide if you want to refresh your memory we, added a hundred and seventy three thousand, dollars worth of materials notice, we are excluding. The cost of that was incurred, last, period beginning WIPP we're only using costs, added this period one. Seventy three divided. By the number of units we equivalent. Units that we started and completed this period, 57. Five okay. So cost, divided. By equivalent, you, materials. This. Period costs, us \$3.00, per equivalent unit. Conversion. We. Added, eighty three thousand, five hundred this period. Divided. By the equivalent units for conversion, of fifty-seven to thirty comes, to one dollar in about forty six cents now, let's, read the note here both, unit, costs three dollars and one dollar. And forty six cents are rounded. Numbers, and this is going to result in a rounding, difference when, we reconcile. This final, number up here when. We figure out what's here and here it's not going to equal to 84 one hundred only because, of rounding it's gonna be slightly off and it's important for you to be able to recognize a rounding, difference okay but because we're rounding these the real number might be 300 eight, one six four two whatever and that will give you a more precise number, we're simply rounding, we went out three decimal points in this case. Okay. So, now that we have, our cost. Per equivalent unit, since, we know that materials, were added at a different rate than conversion. So we had to come up with two different numbers we. Can now come. Up with our cost. Analysis. This shows where. All the costs, to 84 100 went, you were there transferred, out or they, went to ending, work in process. Okay.

So. Here we go we've, seen these numbers before. Costs. That, we started with we still have to account for them because they're still sitting in the product, itself think, of a car that, started, out twenty percent complete now is 80 percent complete it has these costs that you began with and we added cost so this includes everything. Costs. That were in beginning work in process twenty seven six. Now. Look, at this next line costs. To, complete. Beginning. Work in process bi is beginning, inventory I should. Have put beginning work in process inventory, so. Notice we didn't have to add any, additional materials because we dumped them in all at once but we, had to incur, the remaining, 40% of, labor, and overhead, so. The, six thousand, two hundred units, in beginning. WIPP we have to do the remaining 40 percent which is the, same as the, equivalent of. 2480, units that we started complete this, period and our. Conversion. Cost per, equivalent unit, we figured out was a dollar and 46, cents rounded, that, gives us three thousand, 618 so. We had to finish, beginning. Work in process first just think of an assembly line had to finish these units these cars before, we could start any more new units. Now. Here's. The cost of units that were started, and completed. This, period from scratch from zero to 100% we. Simply take 50. 2,500, units started, and completed again, on a previous, slide. Multiply. It times 3 for materials, get. 157, 5 multiply. 52. 5 started, and completed times. The buck 46, for conversion, now, if you wanted to since these were all started, and completed this period you could simply add 3. Plus 146. And you could have said 50, to 500 units, started, in completed times for. 46. And that would give you the same number okay. So. All. The costs that we inherited, from last period sitting, in beginning WIPP plus, the, cost we had to incur to finish, those beginning, work-in-process units, plus. The. Cost of all, the units we both started, and completed this period. Equals. Cost of goods completed, and transferred, out, that's this number here. 265, 316, and again there'll be a rounding difference and if, we're. Whip department, a and now we're transferring, it to whip Department, B we. Would debit whip B inventory. Credit, hour Department whip a if, we, were the last work in process department, before finished, goods we, would debit finish, goods, credit.

Whip, C, whatever our department was okay, now. Ending. Inventory. Remember we assembly, line we saw some units at the end of the day December 31st that are not yet finished we, have to put this on the balance sheet as beginning. Inventory, excuse, me ending inventory. Okay. Now. Materials. Remember we had 5,000. Units that were 45%. Complete. In. Ending, whip we. Dumped, all the, material, into the bowl this period for those 5000, units so notice from, a material, standpoint, 5,000. Units an ending work in process they. Have everything so 5000 times 3. \$15,000. Conversion. Costs, are 45%, complete. So 5,000. Units 5000, cars that, on average are 45% complete. Okay. Is the, equivalent, to 2,000, 250. Equivalent. Whole or completed, units at a. Conversion, cost, per, equivalent unit, of a buck 46, gives us 3000. 283. Okay. Ending, work in process materials. Plus, conversion, which is materials, plus labor plus overhead. 18,000. 283. So. If you were to add up to 65. 316. Plus. 18. 283. We. Would have accounted for these costs now again will be off by a couple of hundred bucks because, of rounding, okay. But you can tell when you have a rounding, difference because say, we're off by for. Example \$400. If, you. Take 400, and you divide it by two hundred eighty four thousand, you can see this is a very small, number and that tells you this is a rounding, difference okay. So. That's what we do first. We calculate the. Number of units that were, started, and completed, okay. Then we figure, out equivalent. Units, then. We figured out cost. Per. Equivalent unit, and then, we assign costs to. The goods that were transferred, out and that, the goods that are still in ending, work in process inventory, and, we do what's called a cost reconciliation. Report which I'll show you at the very end of this presentation, okay. That, is first-in first-out okay. Now, we're gonna look at the. Weighted average, method. Okay. The. Weighted average, method is, actually. Easier. Than FIFO. Let's. Take a look. And this. Is the same data that we began with. 6200. Units in beginning, inventory, for, working process that are, 60%. Complete, from, a conversion standpoint. Okay. Note, the completion, percentage, depletion for beginning WIPP is gonna be ignored in, the. Weighted, average method, we. Started. Fifty-seven, thousand, five hundred units, this period and, we. Have five thousand, units in ending, work, in process that, are forty five percent complete. From a conversion standpoint, okay, now we assume that for, materials, in this example and I'll tell you on an example of the assumptions, we'll assume all the, materials, were. Added, in at the beginning of the process just think of pouring pancake. Mix into, the bowl it has all the materials then you put the water in and then you incur, conversion. Cost which is your labor direct. Labor and overhead costs, evenly. Throughout the period think of a big bowl that's your equipment, that's your factory the flame that's your utilities, and a direct labor person stirring, the mix okay.

You, Incur those costs, evenly. Throughout, the period. Now. Beginning. Work in process sixty. Two hundred units that are sixty percent complete, from, a conversion standpoint a dot that have a hundred percent of their materials, last. Period, we added, eighteen, thousand, six hundred of materials, nine, thousand, of labor over an overhead for a total of twenty, seven thousand, six hundred. This. Period, we. Added, one. Hundred and seventy three thousand, more, of materials, and we incurred an additional, eighty three thousand, five hundred of labor this, period we added, two. Hundred and fifty six thousand, five hundred dollars of additional costs. So. Our total, costs that we have to account for are. Twenty, seven thousand, six hundred, plus. Two fifty six five equals. Two hundred eighty four thousand, one hundred we. Have to figure, out where. Did these cost go they. Went one of two different places, most. Of it was. Finished, we completed the production, and trained furred out either into. The next work-in-process, Department, or the next finished goods or to, finish goods inventory and, then, some of it is still sitting, incomplete. In work and process at the end of this period, that'll, be ending, work in process inventory, which, we know goes on the balance sheet so we need to know these two numbers. Okay. So what, do we do with this, 280 4100 which again is your, total beginning, WIPP costs, materials. Labor and overhead plus, total costs added this period of 256. 5. Ok. Using. The weighted average method, we. Ignore, the, units, in beginning, inventory and this is easier than the FIFO, method, so. We. Completed, fifty, eight thousand. Seven hundred units. Obviously. If we completed them as far. As our department. Is concerned they've got a hundred percent of everything they're going to need before we push them out the door teeth, of the next work-in-process department, or to finish goods and. In. Our department, we have five thousand, units that, are still in ending inventory that, are forty-five percent complete, from, a conversion standpoint, you. Need that number so remember, you can ignore beginning, inventory the units and the. Percentage completion for weighted average you don't need those but you do need the, units and the, percentage of completion in ending. Work in process. Now. We have to calculate what we call equivalent.